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PULTEGROUP INC/MI/ - Quarter Report: 2016 September (Form 10-Q)


______________________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9804 

PULTEGROUP, INC.
(Exact name of registrant as specified in its charter) 
MICHIGAN
 
38-2766606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

3350 Peachtree Road NE, Suite 150
Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (404) 978-6400

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  [X]   NO  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  [X]   NO  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  [X]
  
Accelerated filer  [ ]
  
Non-accelerated filer [ ]  
  
Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
YES [ ]  NO  [X]

Number of shares of common stock outstanding as of October 14, 2016: 330,739,747 ______________________________________________________________________________________________________

1


PULTEGROUP, INC.
INDEX

 
 
Page
No.
PART I
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
PART II
 
 
 
Item 2
 
 
 
Item 6
 
 
 
 
 


2


PART I. FINANCIAL INFORMATION

Item 1.      Financial Statements

PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)
 
 
September 30,
2016
 
December 31,
2015
 
(Unaudited)
 
(Note)
ASSETS
 
 
 
 
 
 
 
Cash and equivalents
$
434,205

 
$
754,161

Restricted cash
26,984

 
21,274

House and land inventory
6,950,242

 
5,450,058

Land held for sale
57,468

 
81,492

Residential mortgage loans available-for-sale
349,012

 
442,715

Investments in unconsolidated entities
51,768

 
41,267

Other assets
647,706

 
660,835

Intangible assets
158,242

 
110,215

Deferred tax assets, net
1,195,905

 
1,394,879

 
$
9,871,532

 
$
8,956,896

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
Accounts payable
$
378,423

 
$
327,725

Customer deposits
248,302

 
186,141

Accrued and other liabilities
1,270,353

 
1,284,273

Income tax liabilities
33,562

 
57,050

Financial Services debt
158,794

 
267,877

Term loan

 
498,423

Senior notes
3,110,066

 
1,576,082

 
5,199,500

 
4,197,571

Shareholders' equity
4,672,032

 
4,759,325

 
$
9,871,532

 
$
8,956,896


Note: The Condensed Consolidated Balance Sheet at December 31, 2015 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.


See accompanying Notes to Condensed Consolidated Financial Statements.


3


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
Home sale revenues
$
1,881,718

 
$
1,464,131

 
$
5,027,843

 
$
3,795,366

Land sale revenues
13,167

 
3,649

 
20,604

 
27,651

 
1,894,885

 
1,467,780

 
5,048,447

 
3,823,017

Financial Services
48,020

 
38,967

 
126,950

 
97,319

Total revenues
1,942,905

 
1,506,747

 
5,175,397

 
3,920,336

 
 
 
 
 
 
 
 
Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
Home sale cost of revenues
1,485,611

 
1,118,874

 
3,949,449

 
2,913,299

Land sale cost of revenues
11,428

 
3,301

 
17,859

 
21,992

 
1,497,039

 
1,122,175

 
3,967,308

 
2,935,291

Financial Services expenses
26,906

 
24,602

 
79,204

 
67,909

Selling, general, and administrative expenses
183,008

 
159,361

 
566,355

 
450,793

Other expense (income), net
23,617

 
21,333

 
42,402

 
23,638

Income before income taxes
212,335

 
179,276

 
520,128

 
442,705

Income tax expense
83,865

 
71,507

 
190,598

 
176,643

Net income
$
128,470

 
$
107,769

 
$
329,530

 
$
266,062

 
 
 
 
 
 
 
 
Per share:
 
 
 
 
 
 
 
Basic earnings
$
0.37

 
$
0.31

 
$
0.95

 
$
0.74

Diluted earnings
$
0.37

 
$
0.30

 
$
0.94

 
$
0.73

Cash dividends declared
$
0.09

 
$
0.08

 
$
0.27

 
$
0.24

 
 
 
 
 
 
 
 
Number of shares used in calculation:



 
 
 
 
Basic
340,171

 
350,147

 
344,383

 
359,236

Effect of dilutive securities
2,250

 
3,225

 
2,557

 
3,273

Diluted
342,421

 
353,372

 
346,940

 
362,509




See accompanying Notes to Condensed Consolidated Financial Statements.


4


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(000’s omitted)
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
128,470

 
$
107,769

 
$
329,530

 
$
266,062

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in value of derivatives
20

 
21

 
61

 
63

Other comprehensive income
20

 
21

 
61

 
63

 
 
 
 
 
 
 
 
Comprehensive income
$
128,490

 
$
107,790

 
$
329,591

 
$
266,125





See accompanying Notes to Condensed Consolidated Financial Statements.


5



PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(000's omitted, except per share data)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Retained
Earnings
 
Total
Shares
 
$
 
Shareholders' Equity, January 1, 2016
349,149

 
$
3,491

 
$
3,093,802

 
$
(609
)
 
$
1,662,641

 
$
4,759,325

Stock option exercises
498

 
5

 
5,840

 

 

 
5,845

Share issuances, net of cancellations
523

 
5

 
8,851

 

 

 
8,856

Dividends declared

 

 

 

 
(93,127
)
 
(93,127
)
Share repurchases
(17,856
)
 
(177
)
 

 

 
(350,669
)
 
(350,846
)
Share-based compensation

 

 
12,976

 

 

 
12,976

Excess tax benefits (deficiencies) from share-based awards

 

 
(588
)
 

 

 
(588
)
Net income

 

 

 

 
329,530

 
329,530

Other comprehensive income

 

 

 
61

 

 
61

Shareholders' Equity, September 30, 2016
332,314

 
$
3,324

 
$
3,120,881

 
$
(548
)
 
$
1,548,375

 
$
4,672,032

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity, January 1, 2015
369,459

 
$
3,695

 
$
3,072,996

 
$
(690
)
 
$
1,728,953

 
$
4,804,954

Stock option exercises
888

 
9

 
10,362

 

 

 
10,371

Share issuances, net of cancellations
431

 
4

 
7,419

 

 

 
7,423

Dividends declared

 

 
8

 

 
(86,304
)
 
(86,296
)
Share repurchases
(21,641
)
 
(216
)
 

 

 
(442,522
)
 
(442,738
)
Share-based compensation

 

 
13,556

 

 

 
13,556

Excess tax benefits (deficiencies) from share-based awards

 

 
(1,790
)
 

 

 
(1,790
)
Net income

 

 

 

 
266,062

 
266,062

Other comprehensive income

 

 

 
63

 

 
63

Shareholders' Equity, September 30, 2015
349,137

 
$
3,492

 
$
3,102,551

 
$
(627
)
 
$
1,466,189

 
$
4,571,605



See accompanying Notes to Condensed Consolidated Financial Statements.

6


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
329,530

 
$
266,062

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Deferred income tax expense
198,974

 
171,364

Depreciation and amortization
40,218

 
33,719

Share-based compensation expense
19,813

 
20,139

Other, net
17,678

 
11,300

Increase (decrease) in cash due to:
 
 
 
Restricted cash
(5,710
)
 
(13,293
)
Inventories
(1,100,173
)
 
(835,276
)
Residential mortgage loans available-for-sale
92,649

 
68,381

Other assets
11,502

 
(130,282
)
Accounts payable, accrued and other liabilities
83,303

 
162,987

Net cash provided by (used in) operating activities
(312,216
)
 
(244,899
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(30,551
)
 
(34,049
)
Cash used for business acquisition
(430,458
)
 

Other investing activities, net
(8,576
)
 
13,669

Net cash used in investing activities
(469,585
)
 
(20,380
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuance
1,995,961

 
498,087

Repayments of debt
(985,734
)
 
(238,520
)
Borrowings under revolving credit facility
619,000

 
125,000

Repayments under revolving credit facility
(619,000
)
 
(125,000
)
Financial Services borrowings (repayments)
(109,083
)
 
(32,733
)
Stock option exercises
5,845

 
10,371

Share repurchases
(350,846
)
 
(442,738
)
Dividends paid
(94,298
)
 
(87,897
)
Net cash provided by (used in) financing activities
461,845

 
(293,430
)
Net increase (decrease) in cash and equivalents
(319,956
)
 
(558,709
)
Cash and equivalents at beginning of period
754,161

 
1,292,862

Cash and equivalents at end of period
$
434,205

 
$
734,153

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid (capitalized), net
$
(11,324
)
 
$
(20,304
)
Income taxes paid (refunded), net
$
(74
)
 
$
740



See accompanying Notes to Condensed Consolidated Financial Statements.

7


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States ("U.S."), and our common shares trade on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also have mortgage banking operations, conducted principally through Pulte Mortgage LLC (“Pulte Mortgage”), and title operations.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Business acquisition

We acquired substantially all of the assets of JW Homes ("Wieland") in January 2016, for $430.5 million in cash and the assumption of certain payables related to such assets. The acquired net assets were located in Atlanta, Charleston, Charlotte, Nashville, and Raleigh, and included approximately 7,000 lots, including 375 homes in inventory, and control of approximately 1,300 lots through land option contracts. We also assumed a sales order backlog of 317 homes. The acquired net assets were recorded at their estimated fair values and resulted in goodwill of $40.4 million and separately identifiable intangible assets of $18.0 million comprised of the John Wieland Homes and Neighborhoods tradename, which is being amortized over a 20-year life. The acquisition of these assets was not material to our results of operations or financial condition.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation, including the adoption in January 2016 of Accounting Standards Update ("ASU") 2015-03, “Interest - Imputation of Interest,” which changes the presentation of debt issuance costs in the balance sheet from an asset to a direct reduction of the carrying amount of the related debt. The adoption of this guidance resulted in the reclassification of applicable unamortized debt issuance costs from other assets to senior notes and term loan. See Note 4.

Subsequent events

We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission ("the SEC").



8


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Other expense (income), net

Other expense (income), net consists of the following ($000’s omitted): 
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2016
 
2015
 
2016
 
2015
Write-off of deposits and pre-acquisition costs
$
2,541

 
$
522

 
$
12,996

 
$
3,633

Lease exit and related costs (a)
4,644

 
275

 
10,589

 
497

Amortization of intangible assets
3,450

 
3,225

 
10,350

 
9,675

Interest income
(887
)
 
(504
)
 
(2,659
)
 
(2,458
)
Interest expense
165

 
203

 
526

 
598

Equity in earnings of unconsolidated entities
(485
)
 
(2,192
)
 
(4,489
)
 
(4,464
)
Miscellaneous, net (b)
14,189

 
19,804

 
15,089

 
16,157

 
$
23,617

 
$
21,333

 
$
42,402

 
$
23,638


(a)
Lease exit and related costs for the three and nine months ended September 30, 2016, resulted from actions taken to reduce overheads and the substantial completion of our corporate headquarters relocation from Michigan to Georgia, which began in 2013.
(b)
Miscellaneous, net includes a charge of $15.0 million related to the settlement of a disputed land transaction for the three and nine months ended September 30, 2016, and a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 8).

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders (the “Numerator”) by the weighted-average number of common shares outstanding, adjusted for unvested shares (the “Denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the Denominator is increased to include the dilutive effects of stock options, unvested restricted shares, unvested restricted share units, and other potentially dilutive instruments. Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation. Our diluted earnings per share calculation excluded 2.3 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units, for both the three and nine months ended September 30, 2016, and 4.2 million and 4.4 million potentially dilutive instruments, including stock options, unvested restricted shares, and unvested restricted share units, for the three and nine months ended September 30, 2015, respectively.    

In accordance with ASC 260 "Earnings Per Share", the two-class method determines earnings per share for each class of common stock and participating securities according to an earnings allocation formula that adjusts the Numerator for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. Our outstanding restricted share awards, restricted share units, and deferred shares are considered participating securities. The following table presents the earnings per common share (000's omitted, except per share data):

9


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net income
$
128,470

 
$
107,769

 
$
329,530

 
$
266,062

Less: earnings distributed to participating securities
(269
)
 
(181
)
 
(836
)
 
(554
)
Less: undistributed earnings allocated to participating securities
(870
)
 
(516
)
 
(1,764
)
 
(1,169
)
Numerator for basic earnings per share
$
127,331

 
$
107,072

 
$
326,930

 
$
264,339

Add back: undistributed earnings allocated to participating securities
870

 
516

 
1,764

 
1,169

Less: undistributed earnings reallocated to participating securities
(865
)
 
(512
)
 
(1,751
)
 
(1,158
)
Numerator for diluted earnings per share
$
127,336

 
$
107,076

 
$
326,943

 
$
264,350

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic shares outstanding
340,171

 
350,147

 
344,383

 
359,236

Effect of dilutive securities
2,250

 
3,225

 
2,557

 
3,273

Diluted shares outstanding
342,421

 
353,372

 
346,940

 
362,509

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
0.31

 
$
0.95

 
$
0.74

Diluted
$
0.37

 
$
0.30

 
$
0.94

 
$
0.73


Residential mortgage loans available-for-sale

Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. At September 30, 2016 and December 31, 2015, residential mortgage loans available-for-sale had an aggregate fair value of $349.0 million and $442.7 million, respectively, and an aggregate outstanding principal balance of $335.4 million and $429.6 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(1.0) million and $1.1 million for the three months ended September 30, 2016 and 2015, respectively, and $0.3 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively. These changes in fair value were substantially offset by changes in fair value of corresponding hedging instruments. Net gains from the sale of mortgages were $30.1 million and $23.4 million for the three months ended September 30, 2016 and 2015, respectively, and $77.4 million and $57.2 million for the nine months ended September 30, 2016 and 2015, respectively, and have been included in Financial Services revenues.

Derivative instruments and hedging activities

We are party to interest rate lock commitments ("IRLCs") with customers resulting from our mortgage origination operations. At September 30, 2016 and December 31, 2015, we had aggregate IRLCs of $319.4 million and $208.2 million, respectively, which were originated at interest rates prevailing at the date of commitment.

We hedge our exposure to interest rate market risk relating to residential mortgage loans available-for-sale and IRLCs using forward contracts on mortgage-backed securities, which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and whole loan commitments, which are obligations of the investor to buy loans at a specified price within a specified time period. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments we use to minimize market risk during the period from the time we execute an interest rate lock until the time the loan is sold to an investor. At September 30, 2016 and December 31, 2015, we had unexpired forward contracts of $539.0 million and $525.0 million, respectively, and whole loan investor commitments of $92.5 million and $77.6 million, respectively. Changes in the fair value of IRLCs and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable.

10


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on interest rate lock commitments and residential mortgage loans available-for-sale are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 60 days. The fair values of derivative instruments and their locations in the Condensed Consolidated Balance Sheets are summarized below ($000’s omitted):
 
 
September 30, 2016
 
December 31, 2015
 
Other Assets
 
Accrued and Other Liabilities
 
Other Assets
 
Accrued and Other Liabilities
Interest rate lock commitments
$
11,140

 
$
262

 
$
5,854

 
$
280

Forward contracts
159

 
2,457

 
1,178

 
840

Whole loan commitments
117

 
713

 
358

 
345

 
$
11,416

 
$
3,432

 
$
7,390

 
$
1,465


New accounting pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, "Revenue from Contracts with Customers". The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The FASB has also issued a number of updates to this standard. The standard is effective for us for annual and interim periods beginning January 1, 2018 and allows for full retrospective or modified retrospective methods of adoption. We are currently evaluating the impact that the standard will have on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”), which requires management to evaluate, at each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and provide related disclosures. ASU 2014-15 is effective for us for annual and interim reporting periods beginning January 1, 2017 and is not expected to have a material impact on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. ASU 2016-02 is effective for us for annual and interim periods beginning January 1, 2019, and early adoption is permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the impact that the standard will have on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"), which includes multiple amendments intended to simplify aspects of share-based payment accounting. ASU 2016-09 will be effective for us for annual and interim periods beginning after January 1, 2017, with early adoption permitted. Amendments to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures will be applied using a modified retrospective transition method through a cumulative-effect adjustment to equity as of the beginning of the period of adoption. Amendments to the presentation of employee taxes on the statement of cash flows will be applied retrospectively, and amendments requiring the recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. We are currently evaluating the impact that the standard will have on our financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology and also requires that credit losses from available-for-sale debt securities be presented as an allowance instead of a write-down. ASU 2016-13 is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted, and requires full retrospective application on adoption. We are currently evaluating the impact the standard will have on our financial statements.

11


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), which addresses several specific cash flow issues. ASU 2016-15 is effective for us for annual and interim periods beginning January 1, 2018, with early adoption permitted, and requires full retrospective application on adoption. We do not expect ASU 2016-15 to have a material impact on our financial statements.

2. Inventory

Major components of inventory were as follows ($000’s omitted): 
 
September 30,
2016
 
December 31,
2015
Homes under construction
$
2,259,830

 
$
1,408,260

Land under development
3,946,132

 
3,259,066

Raw land
744,280

 
782,732

 
$
6,950,242

 
$
5,450,058


We capitalize interest cost into inventory during the active development and construction of our communities. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Information related to interest capitalized into inventory is as follows ($000’s omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Interest in inventory, beginning of period
$
167,488

 
$
164,384

 
$
149,498

 
$
167,638

Interest capitalized
42,030

 
28,006

 
115,545

 
90,105

Interest expensed
(32,857
)
 
(36,609
)
 
(88,382
)
 
(101,962
)
Interest in inventory, end of period
$
176,661

 
$
155,781

 
$
176,661

 
$
155,781


Land option agreements

We enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land purchases, the availability and best use of necessary incremental capital, and other factors. We record any such write-offs of deposits and pre-acquisition costs within other expense, net.

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. No VIEs required consolidation at either September 30, 2016 or December 31, 2015 because we determined that we were not the VIE's primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements.


12


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following provides a summary of our interests in land option agreements as of September 30, 2016 and December 31, 2015 ($000’s omitted): 
 
September 30, 2016
 
December 31, 2015
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
Land options with VIEs
$
69,279

 
$
922,624

 
$
77,641

 
$
1,064,506

Other land options
104,408

 
1,242,821

 
84,478

 
981,687

 
$
173,687

 
$
2,165,445

 
$
162,119

 
$
2,046,193


3. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
Northeast:
 
Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Virginia
Southeast:
 
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Midwest:
 
Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Ohio
Texas:
 
Texas
West:
 
Arizona, California, Nevada, New Mexico, Washington

We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking and title operations and operate generally in the same markets as the Homebuilding segments.

13


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Operating Data by Segment
($000’s omitted)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Northeast
$
155,226

 
$
182,547

 
$
426,397

 
$
430,881

Southeast (a)
375,148

 
282,051

 
1,057,249

 
713,090

Florida
307,588

 
247,528

 
860,869

 
659,330

Midwest
342,709

 
256,676

 
819,250

 
662,817

Texas
261,693

 
203,319

 
730,456

 
566,307

West
452,521

 
295,659

 
1,154,226

 
790,592

 
1,894,885

 
1,467,780

 
5,048,447

 
3,823,017

Financial Services
48,020

 
38,967

 
126,950

 
97,319

Consolidated revenues
$
1,942,905

 
$
1,506,747

 
$
5,175,397

 
$
3,920,336

 
 
 
 
 
 
 
 
Income before income taxes:
 
 
 
 
 
 
 
Northeast (b)
$
6,056

 
$
13,208

 
$
34,884

 
$
38,065

Southeast (a)
36,370

 
45,708

 
96,898

 
110,203

Florida
45,891

 
49,046

 
130,546

 
121,585

Midwest
36,792

 
25,270

 
68,665

 
41,080

Texas
38,878

 
26,035

 
103,618

 
73,313

West
55,347

 
36,633

 
130,683

 
100,154

Other homebuilding (c)
(28,271
)
 
(30,989
)
 
(93,252
)
 
(71,104
)
 
191,063

 
164,911

 
472,042

 
413,296

Financial Services
21,272

 
14,365

 
48,086

 
29,409

Consolidated income before income taxes
$
212,335

 
$
179,276

 
$
520,128

 
$
442,705


(a)
Southeast includes the acquisition in January 2016 of substantially all of the assets of Wieland (see Note 1).
(b)
Northeast includes a charge of $15.0 million related to the settlement of a disputed land transaction for the three and nine months ended September 30, 2016, and a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 8).
(c)
Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. For the three and nine months ended September 30, 2015, Other homebuilding also includes a reserve reversal of $5.7 million and $32.6 million, respectively, resulting from a favorable legal settlement.


14


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Operating Data by Segment
 
($000's omitted)
 
September 30, 2016
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
234,959

 
$
376,845

 
$
104,426

 
$
716,230

 
$
818,569

Southeast (a)
407,586

 
574,702

 
195,619

 
1,177,907

 
1,267,731

Florida
346,839

 
678,518

 
129,639

 
1,154,996

 
1,293,934

Midwest
321,833

 
461,584

 
47,895

 
831,312

 
892,039

Texas
246,786

 
391,793

 
85,307

 
723,886

 
805,458

West
672,170

 
1,227,980

 
158,374

 
2,058,524

 
2,275,186

Other homebuilding (b)
29,657

 
234,710

 
23,020

 
287,387

 
2,103,325

 
2,259,830

 
3,946,132

 
744,280

 
6,950,242

 
9,456,242

Financial Services

 

 

 

 
415,290

 
$
2,259,830

 
$
3,946,132

 
$
744,280

 
$
6,950,242

 
$
9,871,532

 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
163,173

 
$
292,631

 
$
121,522

 
$
577,326

 
$
688,610

Southeast
196,456

 
367,577

 
139,246

 
703,279

 
765,933

Florida
227,910

 
574,092

 
97,185

 
899,187

 
1,013,543

Midwest
197,738

 
414,386

 
68,918

 
681,042

 
734,834

Texas
191,424

 
317,702

 
107,737

 
616,863

 
691,342

West
413,208

 
1,094,112

 
222,920

 
1,730,240

 
1,924,958

Other homebuilding (b)
18,351

 
198,566

 
25,204

 
242,121

 
2,628,687

 
1,408,260

 
3,259,066

 
782,732

 
5,450,058

 
8,447,907

Financial Services

 

 

 

 
508,989

 
$
1,408,260

 
$
3,259,066

 
$
782,732

 
$
5,450,058

 
$
8,956,896

 
(a)
Southeast includes the acquisition in January 2016 of substantially all of the assets of Wieland (see Note 1).
(b)
Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments.
 

15


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4. Debt

Senior notes

Our senior notes are summarized as follows ($000’s omitted):
 
September 30,
2016
 
December 31,
2015
6.500% unsecured senior notes due May 2016 (a)

 
465,245

7.625% unsecured senior notes due October 2017 (b)
123,000

 
123,000

4.250% unsecured senior notes due March 2021 (a)
700,000

 

5.500% unsecured senior notes due March 2026 (a)
700,000

 

5.000% unsecured senior notes due January 2027 (a)
600,000

 

7.875% unsecured senior notes due June 2032 (a)
300,000

 
300,000

6.375% unsecured senior notes due May 2033 (a)
400,000

 
400,000

6.000% unsecured senior notes due February 2035 (a)
300,000

 
300,000

Net premiums, discounts, and issuance costs (c)
(12,934
)
 
(12,163
)
Total senior notes
$
3,110,066

 
$
1,576,082

Estimated fair value
$
3,270,878

 
$
1,643,651


(a)
Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.
(b)
Not redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.
(c)
The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes. As discussed in Note 1, we adopted ASU 2015-03 in January 2016. We applied the new guidance retrospectively to all prior periods presented in the financial statements to conform to the 2016 presentation. As a result, $10.3 million of debt issuance costs at December 31, 2015, were reclassified from other assets to a reduction in senior notes.

In February 2016, we issued $1.0 billion of senior unsecured notes, consisting of $300 million of 4.25% senior notes due March 1, 2021, and $700 million of 5.50% senior notes due March 1, 2026. The net proceeds from this senior notes issuance were used to fund the retirement of $465.2 million of our senior notes that matured in May 2016, with the remaining net proceeds used for general corporate purposes. In July 2016, we issued an additional $1.0 billion of senior unsecured notes, consisting of an additional $400 million of the 4.25% senior notes due March 1, 2021, and $600 million of 5.00% senior notes due January 15, 2027. The net proceeds from the July senior notes issuance were used for general corporate purposes and to pay down approximately $500.0 million of outstanding debt, including the remainder of the previously existing term loan facility, which resulted in a write-off of $0.7 million of remaining debt issuance costs. The senior notes issued in 2016 are unsecured obligations, and rank equally in right of payment with the existing and future senior unsecured indebtedness of the Company and each of the guarantors, respectively. The notes are redeemable at our option at any time up to the date of maturity.

Revolving credit facility

In June 2016, we entered into an amended and restated senior unsecured revolving credit facility (the “Revolving Credit Facility”) that provided for an increase in our maximum borrowings from $500.0 million to $750.0 million and extended the maturity date from July 2017 to June 2019.  The Revolving Credit Facility contains an uncommitted accordion feature that could increase the size of the Revolving Credit Facility to $1.25 billion, subject to certain conditions and availability of additional bank commitments.  The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility with a sublimit of $375.0 million at September 30, 2016. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined.  We had no borrowings outstanding and $245.7 million and $191.3 million of letters of credit issued under the Revolving Credit Facility at September 30, 2016 and December 31, 2015, respectively.

16


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of September 30, 2016, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties that totaled $20.5 million at September 30, 2016 and $35.3 million at December 31, 2015. These notes have maturities ranging up to four years, are collateralized by the land positions to which they relate, have no recourse to any other assets, and are classified within accrued and other liabilities. The stated interest rates on these notes range up to 5.00%.

Pulte Mortgage

Pulte Mortgage maintains a master repurchase agreement (the “Repurchase Agreement”) with third party lenders. In August 2016, Pulte Mortgage entered into an amended and restated Repurchase Agreement that extended the effective date to August 2017, and adjusted the maximum aggregate commitment amount according to seasonal borrowing capacity needs. The maximum aggregate commitment is $175.0 million as of August 15, 2016, and increases to as high as $300.0 million during the seasonally high borrowing period from December 27, 2016 through January 12, 2017. At all other times, the maximum aggregate commitment ranges from $175.0 million to $200.0 million. The purpose of the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $158.8 million and $267.9 million outstanding under the Repurchase Agreement at September 30, 2016 and December 31, 2015, respectively, and was in compliance with all of its covenants and requirements as of such dates.

5. Shareholders’ equity

During the nine months ended September 30, 2016, we declared cash dividends totaling $93.1 million and repurchased 17.7 million shares under our repurchase authorization for a total of $347.7 million. During the nine months ended September 30, 2015, we declared cash dividends totaling $86.3 million and repurchased 21.2 million shares under our repurchase authorization for a total of $433.7 million. In July 2016, our Board of Directors approved a $1.0 billion increase in our share repurchase authorization. At September 30, 2016, we had remaining authorization to repurchase $1.3 billion of common shares.

Under our share-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of shares, generally related to the payment of minimum tax obligations. During the nine months ended September 30, 2016 and 2015, participants surrendered shares valued at $3.2 million and $9.0 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.

6. Income taxes

Our effective tax rate for the three and nine months ended September 30, 2016 was 39.5% and 36.6%, respectively, compared to 39.9% for the same periods in 2015. Our effective tax rate for the current year differed from the federal statutory tax rate primarily due to state income taxes on current year earnings, the favorable resolution of certain state income tax matters, and adjustments to deferred tax assets due to changes in state tax laws. For the prior year, our effective tax rate differed from the federal statutory tax rate primarily due to state income taxes and adjustments to deferred taxes due to changes in state tax laws and business operations. 

At September 30, 2016 and December 31, 2015, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $1.2 billion and $1.4 billion, respectively. The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of

17


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time. 

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. At September 30, 2016 and December 31, 2015, we had $22.1 million and $39.0 million, respectively, of gross unrecognized tax benefits and $12.1 million and $17.2 million, respectively, of related accrued interest and penalties. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $18.0 million, excluding interest and penalties, primarily due to expirations of certain statutes of limitations and potential settlements.

We are currently under examination by the IRS and various state taxing jurisdictions and anticipate finalizing certain examinations within the next twelve months. The final outcome of these examinations is not yet determinable. The statutes of limitation for our major tax jurisdictions generally remain open for examination for tax years 2005 to 2016.

7. Fair value disclosures

ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows: 
Level 1
 
Fair value determined based on quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
 
Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
 
 
Level 3
 
Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

Our assets and liabilities measured or disclosed at fair value are summarized below ($000’s omitted): 
Financial Instrument
 
Fair Value
Hierarchy
 
Fair Value
September 30,
2016
 
December 31,
2015
 
 
 
 
 
 
 
Measured at fair value on a recurring basis:
 
 
 
 
 
 
Residential mortgage loans available-for-sale
 
Level 2
 
$
349,012

 
$
442,715

Interest rate lock commitments
 
Level 2
 
10,878

 
5,574

Forward contracts
 
Level 2
 
(2,298
)
 
338

Whole loan commitments
 
Level 2
 
(596
)
 
13

 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
House and land inventory
 
Level 3
 
$

 
$
11,052

 
 
 
 
 
 
 
Disclosed at fair value:
 
 
 
 
 
 
Cash and equivalents (including restricted cash)
 
Level 1
 
$
461,189

 
$
775,435

Financial Services debt
 
Level 2
 
158,794

 
267,877

Term loan
 
Level 2
 

 
500,000

Senior notes
 
Level 2
 
3,270,878

 
1,643,651


Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. Fair

18


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

values for interest rate lock commitments, including the value of servicing rights, are based on market prices for similar instruments. Forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan commitments are based on market prices for similar instruments from the specific whole loan investor.

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair values included in the above table represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates.

The carrying amounts of cash and equivalents, Financial Services debt, the Term Loan, and the Revolving Credit Facility approximate their fair values due to their short-term nature and floating interest rate terms. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $3.1 billion and $1.6 billion at September 30, 2016 and December 31, 2015, respectively.

8. Commitments and contingencies

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties made by us that the loans met certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. Determining the liabilities for anticipated losses requires a significant level of management judgment. Given the nature of these claims and the uncertainty regarding their ultimate resolution, actual costs could differ from our current estimates. Changes in these liabilities were as follows ($000's omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Liabilities, beginning of period
$
35,945

 
$
58,238

 
$
46,381

 
$
58,222

Reserves provided (released), net
(138
)
 
81

 
629

 
220

Payments
(264
)
 
(23
)
 
(11,467
)
 
(146
)
Liabilities, end of period
$
35,543

 
$
58,296

 
$
35,543

 
$
58,296


Letters of credit and surety bonds

In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $245.7 million and $1.1 billion, respectively, at September 30, 2016 and $191.3 million and $1.0 billion, respectively, at December 31, 2015. In the event any such letter of credit or surety bond is drawn, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be drawn. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

Litigation and regulatory matters

We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending

19


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations.

We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant. During the three months ended September 30, 2016, we settled a contract dispute related to a land transaction that we terminated approximately ten years ago in response to a collapse in housing demand. As a result of the settlement, we recorded a charge of $15.0 million, which is reflected in other expense, net.

In September 2012, Applecross Club Operations ("Applecross") filed a complaint for breach of contract and promissory estoppel in Applecross v. Pulte Homes of PA, et al. The complaint alleged that we induced Applecross to purchase a golf course from us in 2010 by promising to build over 1,000 residential units in a planned community located outside Philadelphia, Pennsylvania. In September 2015, the jury in the case found in favor of Applecross and awarded damages in the amount of $20.0 million. We believe we have meritorious defenses and have appealed the award. However, in light of the jury’s verdict, we recorded a reserve of $20.0 million in the three months ended September 30, 2015, which is reflected in other expense, net.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to and in limited instances exceeding 10 years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to warranty liabilities were as follows ($000’s omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Warranty liabilities, beginning of period
$
61,839

 
$
54,502

 
$
61,360

 
$
65,389

Reserves provided
19,221

 
12,575

 
45,744

 
32,586

Payments
(14,886
)
 
(14,316
)
 
(40,729
)
 
(45,793
)
Other adjustments
(1,753
)
 
1,773

 
(1,954
)
 
2,352

Warranty liabilities, end of period
$
64,421

 
$
54,534

 
$
64,421

 
$
54,534


Self-insured risks

We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.

Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The

20


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to maintain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or participate in a project-specific insurance program provided by us. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by us. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage generally requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid to satisfy insured claims apply to our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omissions, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims.

Our recorded reserves for all such claims totaled $702.5 million and $692.1 million at September 30, 2016 and December 31, 2015, respectively, the vast majority of which relates to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 64% and 65% of the total general liability reserves at September 30, 2016 and December 31, 2015, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

Housing market conditions have been volatile across most of our markets over the past ten years, and we believe such conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs. Adjustments to reserves are recorded in the period in which the change in estimate occurs.

During the three and nine months ended September 30, 2015, we recorded a general liability reserve reversal of $5.7 million and $32.6 million, respectively, resulting from a legal settlement relating to plumbing claims initially reported to us in 2008 and for which our recorded liabilities were adjusted over time based on changes in facts and circumstances. These claims ultimately resulted in a class action lawsuit involving a national vendor and numerous other homebuilders, homebuyers, and insurance companies. In 2015, a global settlement was reached, pursuant to which we funded our agreed upon share of settlement costs, which were significantly lower than our previously estimated exposure.

Costs associated with our insurance programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted):

21


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Balance, beginning of period
$
707,306

 
$
700,133

 
$
692,053

 
$
710,245

Reserves provided, net
20,234

 
14,021

 
65,302

 
20,467

Payments
(24,993
)
 
(11,670
)
 
(54,808
)
 
(28,228
)
Balance, end of period
$
702,547

 
$
702,484

 
$
702,547

 
$
702,484


In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. Such receivables are recorded in other assets and totaled $136.9 million and $130.2 million at September 30, 2016 and December 31, 2015, respectively. The insurance receivables relate to costs incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of construction defect claims that we believe are insured. Given the complexity inherent with resolving construction defect claims in the homebuilding industry as described above, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers. In addition, disputes between homebuilders and carriers over coverage positions relating to construction defect claims are common. Resolution of claims with carriers involves the exchange of significant amounts of information and frequently involves legal action. Currently, we are the plaintiff in litigation with certain of our insurance carriers in regard to $108.1 million of recorded insurance receivables relating to the applicability of coverage to such costs under their policies.

We believe collection of these insurance receivables, including those in litigation, is probable based on the legal merits of our positions after review by legal counsel, favorable legal rulings received to date, the high credit ratings of our carriers, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims, including significant amounts funded by the above carriers under different policies. While the outcome of these matters cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows.

9. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by certain of our wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Our subsidiaries comprising the Financial Services segment along with certain other subsidiaries (collectively, the "Non-Guarantor Subsidiaries") do not guarantee the senior notes. In accordance with Rule 3-10 of Regulation S-X, supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting.


22


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2016
($000’s omitted)
 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$

 
$
373,539

 
$
60,666

 
$

 
$
434,205

Restricted cash

 
25,984

 
1,000

 

 
26,984

House and land inventory

 
6,895,174

 
55,068

 

 
6,950,242

Land held for sale

 
56,958

 
510

 

 
57,468

Residential mortgage loans available-
for-sale

 

 
349,012

 

 
349,012

Investments in unconsolidated entities
103

 
46,679

 
4,986

 

 
51,768

Other assets
12,871

 
509,904

 
124,931

 

 
647,706

Intangible assets

 
158,242

 

 

 
158,242

Deferred tax assets, net
1,194,646

 

 
1,259

 

 
1,195,905

Investments in subsidiaries and
intercompany accounts, net
6,689,355

 
(565,940
)
 
6,521,080

 
(12,644,495
)
 

 
$
7,896,975

 
$
7,500,540

 
$
7,118,512

 
$
(12,644,495
)
 
$
9,871,532

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
accrued and other liabilities
$
81,315

 
$
1,648,402

 
$
167,361

 
$

 
$
1,897,078

Income tax liabilities
33,562

 

 

 

 
33,562

Financial Services debt

 

 
158,794

 

 
158,794

Term loan

 





 

Senior notes
3,110,066

 

 

 

 
3,110,066

Total liabilities
3,224,943

 
1,648,402

 
326,155

 

 
5,199,500

Total shareholders’ equity
4,672,032

 
5,852,138

 
6,792,357

 
(12,644,495
)
 
4,672,032

 
$
7,896,975

 
$
7,500,540

 
$
7,118,512

 
$
(12,644,495
)
 
$
9,871,532



23


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2015
($000’s omitted)
 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$

 
$
638,602

 
$
115,559

 
$

 
$
754,161

Restricted cash

 
20,274

 
1,000

 

 
21,274

House and land inventory

 
5,450,058

 

 

 
5,450,058

Land held for sale

 
80,458

 
1,034

 

 
81,492

Residential mortgage loans available-
for-sale

 

 
442,715

 

 
442,715

Investments in unconsolidated entities
93

 
36,499

 
4,675

 

 
41,267

Other assets
38,991

 
531,120

 
90,724

 

 
660,835

Intangible assets

 
110,215

 

 

 
110,215

Deferred tax assets, net
1,392,251

 
11

 
2,617

 

 
1,394,879

Investments in subsidiaries and
intercompany accounts, net
5,529,606

 
465,644

 
6,293,018

 
(12,288,268
)
 

 
$
6,960,941

 
$
7,332,881

 
$
6,951,342

 
$
(12,288,268
)
 
$
8,956,896

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
accrued and other liabilities
$
70,061

 
$
1,558,885

 
$
169,193

 
$

 
$
1,798,139

Income tax liabilities
57,050

 

 

 

 
57,050

Financial Services debt

 

 
267,877

 

 
267,877

Term loan
498,423

 

 

 

 
498,423

Senior notes
1,576,082

 

 

 

 
1,576,082

Total liabilities
2,201,616

 
1,558,885

 
437,070

 

 
4,197,571

Total shareholders’ equity
4,759,325

 
5,773,996

 
6,514,272

 
(12,288,268
)
 
4,759,325

 
$
6,960,941

 
$
7,332,881

 
$
6,951,342

 
$
(12,288,268
)
 
$
8,956,896



24


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended September 30, 2016
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$

 
$
1,871,284

 
$
10,434

 
$

 
$
1,881,718

Land sale revenues

 
13,167

 

 

 
13,167

 

 
1,884,451

 
10,434

 

 
1,894,885

Financial Services

 

 
48,020

 

 
48,020

 

 
1,884,451

 
58,454

 

 
1,942,905

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues

 
1,474,377

 
11,234

 

 
1,485,611

Land sale cost of revenues

 
11,428

 

 

 
11,428

 

 
1,485,805

 
11,234

 

 
1,497,039

Financial Services expenses

 
145

 
26,761

 

 
26,906

Selling, general, and administrative
expenses

 
176,998

 
6,010

 

 
183,008

Other expense (income), net
823

 
26,166

 
(3,372
)
 

 
23,617

Intercompany interest
487

 
2,072

 
(2,559
)
 

 

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(1,310
)
 
193,265

 
20,380

 

 
212,335

Income tax expense (benefit)
(498
)
 
76,552

 
7,811

 

 
83,865

Income (loss) before equity in income
(loss) of subsidiaries
(812
)
 
116,713

 
12,569

 

 
128,470

Equity in income (loss) of subsidiaries
129,282

 
21,948

 
75,884

 
(227,114
)
 

Net income (loss)
128,470

 
138,661

 
88,453

 
(227,114
)
 
128,470

Other comprehensive income
20

 

 

 

 
20

Comprehensive income (loss)
$
128,490

 
$
138,661

 
$
88,453

 
$
(227,114
)
 
$
128,490



25


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended September 30, 2015
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$

 
$
1,464,131

 
$

 
$

 
$
1,464,131

Land sale revenues

 
3,649

 

 

 
3,649

 

 
1,467,780

 

 

 
1,467,780

Financial Services

 

 
38,967

 

 
38,967

 

 
1,467,780

 
38,967

 

 
1,506,747

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues

 
1,118,874

 

 

 
1,118,874

Land sale cost of revenues

 
3,301

 

 

 
3,301

 

 
1,122,175

 

 

 
1,122,175

Financial Services expenses
13

 
(13
)
 
24,602

 

 
24,602

Selling, general, and administrative
expenses

 
158,975

 
386

 

 
159,361

Other expense (income), net
202

 
21,267

 
(136
)
 

 
21,333

Intercompany interest
594

 
2,039

 
(2,633
)
 

 

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(809
)
 
163,337

 
16,748

 

 
179,276

Income tax expense (benefit)
(307
)
 
65,347

 
6,467

 

 
71,507

Income (loss) before equity in income
(loss) of subsidiaries
(502
)
 
97,990

 
10,281

 

 
107,769

Equity in income (loss) of subsidiaries
108,271

 
9,913

 
82,484

 
(200,668
)
 

Net income (loss)
107,769

 
107,903

 
92,765

 
(200,668
)
 
107,769

Other comprehensive income
21

 

 

 

 
21

Comprehensive income (loss)
$
107,790

 
$
107,903

 
$
92,765

 
$
(200,668
)
 
$
107,790





















26


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the nine months ended September 30, 2016
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$

 
$
5,011,027

 
$
16,816

 
$

 
$
5,027,843

Land sale revenues

 
19,069

 
1,535

 

 
20,604

 

 
5,030,096

 
18,351

 

 
5,048,447

Financial Services

 

 
126,950

 

 
126,950

 

 
5,030,096

 
145,301

 

 
5,175,397

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues

 
3,930,546

 
18,903

 

 
3,949,449

Land sale cost of revenues

 
16,577

 
1,282

 

 
17,859

 

 
3,947,123

 
20,185

 

 
3,967,308

Financial Services expenses

 
405

 
78,799

 

 
79,204

Selling, general, and administrative
expenses

 
549,094

 
17,261

 

 
566,355

Other expense (income), net
1,164

 
56,599

 
(15,361
)
 

 
42,402

Intercompany interest
1,487

 
6,290

 
(7,777
)
 

 

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(2,651
)
 
470,585

 
52,194

 

 
520,128

Income tax expense (benefit)
(1,008
)
 
171,535

 
20,071

 

 
190,598

Income (loss) before equity in income
(loss) of subsidiaries
(1,643
)
 
299,050

 
32,123

 

 
329,530

Equity in income (loss) of subsidiaries
331,173

 
31,827

 
261,777

 
(624,777
)
 

Net income (loss)
329,530

 
330,877

 
293,900

 
(624,777
)
 
329,530

Other comprehensive income
61

 

 

 

 
61

Comprehensive income (loss)
$
329,591

 
$
330,877

 
$
293,900

 
$
(624,777
)
 
$
329,591





















27


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the nine months ended September 30, 2015
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$

 
$
3,795,366

 
$

 
$

 
$
3,795,366

Land sale revenues

 
27,651

 

 

 
27,651

 

 
3,823,017

 

 

 
3,823,017

Financial Services

 

 
97,319

 

 
97,319

 

 
3,823,017

 
97,319

 

 
3,920,336

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues

 
2,913,299

 

 

 
2,913,299

Land sale cost of revenues

 
21,992

 

 

 
21,992

 

 
2,935,291

 

 

 
2,935,291

Financial Services expenses
300

 
(274
)
 
67,883

 

 
67,909

Selling, general, and administrative
expenses

 
449,261

 
1,532

 

 
450,793

Other expense (income), net
572

 
23,702

 
(636
)
 

 
23,638

Intercompany interest
1,537

 
5,886

 
(7,423
)
 

 

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(2,409
)
 
409,151

 
35,963

 

 
442,705

Income tax expense (benefit)
(917
)
 
163,713

 
13,847

 

 
176,643

Income (loss) before equity in income
(loss) of subsidiaries
(1,492
)
 
245,438

 
22,116

 

 
266,062

Equity in income (loss) of subsidiaries
267,554

 
21,586

 
227,143

 
(516,283
)
 

Net income (loss)
266,062

 
267,024

 
249,259

 
(516,283
)
 
266,062

Other comprehensive income
63

 

 

 

 
63

Comprehensive income (loss)
$
266,125

 
$
267,024

 
$
249,259

 
$
(516,283
)
 
$
266,125





















28


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2016
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Net cash provided by (used in)
operating activities
$
159,366

 
$
(567,875
)
 
$
96,293

 
$

 
$
(312,216
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(28,243
)
 
(2,308
)
 

 
(30,551
)
Cash used for business acquisitions

 
(430,458
)
 

 

 
(430,458
)
Other investing activities, net

 
(10,136
)
 
1,560

 

 
(8,576
)
Net cash provided by (used in)
investing activities

 
(468,837
)
 
(748
)
 

 
(469,585
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from debt issuance
1,991,961

 
4,000

 

 

 
1,995,961

Repayments of debt
(965,245
)
 
(20,394
)
 
(95
)
 

 
(985,734
)
Borrowings under revolving credit facility
619,000

 

 

 

 
619,000

Repayments under revolving credit facility
(619,000
)
 

 

 

 
(619,000
)
Financial Services borrowings (repayments)

 

 
(109,083
)
 

 
(109,083
)
Stock option exercises
5,845

 

 

 

 
5,845

Share repurchases
(350,846
)
 

 

 

 
(350,846
)
Dividends paid
(94,298
)
 

 

 

 
(94,298
)
Intercompany activities, net
(746,783
)
 
788,043

 
(41,260
)
 

 

Net cash provided by (used in)
financing activities
(159,366
)
 
771,649

 
(150,438
)
 

 
461,845

Net increase (decrease) in cash and
equivalents

 
(265,063
)
 
(54,893
)
 

 
(319,956
)
Cash and equivalents at beginning of
period

 
638,602

 
115,559

 

 
754,161

Cash and equivalents at end of period
$

 
$
373,539

 
$
60,666

 
$

 
$
434,205



29


PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2015
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Net cash provided by (used in)
operating activities
$
164,558

 
$
(468,838
)
 
$
59,381

 
$

 
$
(244,899
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures

 
(31,197
)
 
(2,852
)
 

 
(34,049
)
Other investing activities, net
3,710

 
785

 
9,174

 

 
13,669

Net cash provided by (used in) investing
activities
3,710

 
(30,412
)
 
6,322

 

 
(20,380
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from debt issuance
498,087

 

 

 

 
498,087

Repayments of debt
(237,994
)
 
(526
)
 

 

 
(238,520
)
Financial Services borrowings (repayments)

 

 
(32,733
)
 

 
(32,733
)
Stock option exercises
10,371

 

 

 

 
10,371

Share repurchases
(442,738
)
 

 

 

 
(442,738
)
Dividends paid
(87,897
)
 

 

 

 
(87,897
)
Intercompany activities, net
84,449

 
30,693

 
(115,142
)
 

 

Net cash provided by (used in)
financing activities
(175,722
)
 
30,167

 
(147,875
)
 

 
(293,430
)
Net increase (decrease) in cash and
equivalents
(7,454
)
 
(469,083
)
 
(82,172
)
 

 
(558,709
)
Cash and equivalents at beginning of
period
7,454

 
1,157,307

 
128,101

 

 
1,292,862

Cash and equivalents at end of period
$

 
$
688,224

 
$
45,929

 
$

 
$
734,153



30


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview

Improving demand conditions in the overall U.S. housing market generally continued through September 2016, though industry-wide new home sales continue to pace below historical averages. We remain pleased with the overall demand for new homes, which continues along a sustained path of recovery supported by ongoing job creation, low unemployment, a supportive interest rate environment, and a limited supply of new homes. Within this environment, we remain focused on driving additional gains in construction and asset efficiency to deliver higher returns on invested capital. Consistent with our positive market view and long-term business strategy, we expect to use our capital to support future growth while consistently returning funds to shareholders through dividends and share repurchases.

We have looked toward 2016 as a year where we would begin adding volume growth to the efficiency gains we have achieved in recent years. Our prior investments are allowing us to grow the business, as evidenced by net new order dollars increasing 23% year to date, as compared to the prior year, and our backlog increasing by 20% to $3.7 billion as of September 30, 2016. We are achieving this growth while also maintaining our focus on gross margin performance through community location, strategic pricing, and construction efficiencies.

Our new community openings continue at an elevated level in 2016. While we have experience opening new communities, starting up new communities can present a challenge in today's environment where entitlement and land development delays are common. We have grown our investment in the business in a disciplined manner by emphasizing smaller projects and working to shorten our years of land supply, including the use of land option agreements when possible. We have also focused our land investments on closer-in locations where we think demand is more sustainable when the market ultimately moderates. We have accepted the trade-off of having to pay more for certain land positions where we can be more confident in the future performance.

The following is a summary of our operating results by line of business ($000's omitted, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Income before income taxes:
 
 
 
 
 
 
 
Homebuilding
$
191,063

 
$
164,911

 
$
472,042

 
$
413,296

Financial Services
21,272

 
14,365

 
48,086

 
29,409

Income before income taxes
212,335

 
179,276

 
520,128

 
442,705

Income tax expense
83,865

 
71,507

 
190,598

 
176,643

Net income
$
128,470

 
$
107,769

 
$
329,530

 
$
266,062

Per share data - assuming dilution:
 
 
 
 
 
 
 
Net income
$
0.37

 
$
0.30

 
$
0.94

 
$
0.73

Homebuilding income before income taxes for the three and nine months ended September 30, 2016 increased compared with the prior year period as the result of higher revenues stemming from increased volume and a higher average selling price. The revenue increase was partially offset by lower gross margins and higher overhead costs, both of which were partially attributable to the assets acquired from Wieland in January 2016 (see Note 1). Income before income taxes also reflects: a charge of $15.0 million for the three and nine months ended September 30, 2016, and a charge of $20.0 million resulting from the Applecross matter for the same periods in 2015 (see Note 8); a reserve reversal resulting from a favorable legal settlement of $32.6 million for the nine months ended September 30, 2015 (see Note 8); and severance, lease exit, and related costs of $12.2 million and $19.7 million for the three and nine months ended September 30, 2016, respectively.
Financial Services income before income taxes for the three and nine months ended September 30, 2016 increased compared with the prior year periods due to an increase in origination volume resulting from higher volumes in the Homebuilding segment combined with higher revenues per loan, which were largely attributable to a higher average loan size combined with favorable market conditions.
Our effective tax rate for the three and nine months ended September 30, 2016 was 39.5% and 36.6%, respectively, compared to 39.9% for the same periods in 2015.


31




Homebuilding Operations

The following presents selected financial information for our Homebuilding operations ($000’s omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2016 vs. 2015
 
2015
 
2016
 
2016 vs. 2015
 
2015
Home sale revenues
$
1,881,718

 
29
%
 
$
1,464,131

 
$
5,027,843

 
32
 %
 
$
3,795,366

Land sale revenues
13,167

 
261
%
 
3,649

 
20,604

 
(25
)%
 
27,651

Total Homebuilding revenues
1,894,885

 
29
%
 
1,467,780

 
5,048,447

 
32
 %
 
3,823,017

Home sale cost of revenues (a)
1,485,611

 
33
%
 
1,118,874

 
3,949,449

 
36
 %
 
2,913,299

Land sale cost of revenues
11,428

 
246
%
 
3,301

 
17,859

 
(19
)%
 
21,992

Selling, general, and administrative
expenses ("SG&A")
(b)
183,008

 
15
%
 
159,361

 
566,355

 
26
 %
 
450,793

Other expense (income), net (c)
23,775

 
11
%
 
21,333

 
42,742

 
81
 %
 
23,637

Income before income taxes
$
191,063

 
16
%
 
$
164,911

 
$
472,042

 
14
 %
 
$
413,296

 
 
 
 
 
 
 
 
 
 
 
 
Supplemental data:
 
 
 
 
 
 
 
 
 
 
 
Gross margin from home sales
21.1
%
 
(250 bps)

 
23.6
%
 
21.4
%
 
(180 bps)

 
23.2
%
SG&A as a percentage of home
sale revenues
9.7
%
 
(120) bps

 
10.9
%
 
11.3
%
 
(60) bps

 
11.9
%
Closings (units)
5,037

 
16
%
 
4,356

 
13,754

 
20
 %
 
11,465

Average selling price
$
374

 
11
%
 
$
336

 
$
366

 
10
 %
 
$
331

Net new orders (d):
 
 
 
 
 
 
 
 
 
 
 
Units
4,775

 
17
%
 
4,092

 
16,124

 
12
 %
 
14,349

Dollars
$
1,831,339

 
25
%
 
$
1,465,322

 
$
6,087,334

 
23
 %
 
$
4,940,560

Cancellation rate
16
%
 
 
 
17
%
 
14
%
 
 
 
13
%
Active communities at September 30
 
 
 
 
 
 
709

 
16
 %
 
611

Backlog at September 30:
 
 
 
 
 
 
 
 
 
 
 
Units
 
 
 
 
 
 
9,417

 
8
 %
 
8,734

Dollars
 
 
 
 
 
 
$
3,698,920

 
20
 %
 
$
3,089,055


(a)
Includes the amortization of capitalized interest.
(b)
Includes a reserve reversal of $5.7 million and $32.6 million resulting from a favorable legal settlement for the three and nine months ended September 30, 2015, respectively (see Note 8). Also includes severance costs of $7.6 million and $9.1 million for the three and nine months ended September 30, 2016, respectively.
(c)
Includes a charge of $15.0 million related to the settlement of a disputed land transaction for the three and nine months ended September 30, 2016, and a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 8). Also includes lease exit and related costs of $4.6 million and $10.6 million for the three and nine months ended September 30, 2016, respectively (see Note 1).
(d)
Net new orders excludes backlog acquired from Wieland in January 2016 (see Note 1). Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.

32



Home sale revenues

Home sale revenues for the three and nine months ended September 30, 2016 were higher than the prior year periods by $417.6 million and $1.2 billion, respectively. For the three months ended September 30, 2016, the 29% increase was attributable to an 11% increase in average selling price and a 16% increase in closings. For the nine months ended September 30, 2016, the 32% increase was attributable to a 10% increase in average selling price and a 20% increase in closings. Such increases reflect the communities acquired from Wieland during the period. For the three months ended September 30, 2016, such communities contributed 6% to the growth in revenue, 4% to the growth in closings and 1% to the increase in average selling price. For the nine months ended September 30, 2016, the communities acquired from Wieland contributed 5% to the growth in revenue, 4% to the growth in closings and 1% to the increase in average selling price. Excluding the communities acquired from Wieland, the increase in closings reflects the significant investments we are making in opening new communities combined with improved demand. The higher average selling price for both the three and nine months ended September 30, 2016, reflects an ongoing shift toward move-up buyers, the inclusion of higher-priced homes offered in Wieland communities, and generally stable market conditions.
    
Home sale gross margins

Home sale gross margins were 21.1% and 21.4% for the three and nine months ended September 30, 2016, respectively, compared to 23.6% and 23.2% for the three and nine months ended September 30, 2015, respectively. The assets acquired from Wieland contributed 70 basis points to this decrease for both periods, primarily as the result of required fair value adjustments associated with the acquired homes in production and related lots. Gross margins remain strong relative to historical levels and reflect a combination of factors, including shifts in community mix, relatively stable pricing conditions, and lower amortized interest costs (1.7% and 1.8% for the three and nine months ended September 30, 2016, respectively, compared to 2.5% and 2.7% for the same periods in 2015), offset by higher house construction and land costs. The lower amortized interest costs resulted from the reduction in our outstanding debt in recent years. We anticipate that our amortized interest costs as a percentage of revenues will remain below 2015 levels for the remainder of 2016, even after consideration of the senior notes issuances completed in February and July 2016 (see Note 4).

Land sales

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales had margin contributions of $1.7 million and $2.7 million for the three and nine months ended September 30, 2016, respectively, compared to $0.3 million and $5.7 million for the three and nine months ended September 30, 2015, respectively.

SG&A

SG&A as a percentage of home sale revenues was 9.7% and 11.3% for the three and nine months ended September 30, 2016, respectively, compared with 10.9% and 11.9% for the three and nine months ended September 30, 2015, respectively. The gross dollar amount of our SG&A increased $23.6 million, or 15%, for the three months ended September 30, 2016, compared to September 30, 2015, and $115.6 million, or 25.6%, for the nine months ended September 30, 2016. The three and nine months ended September 30, 2015, benefited from a reserve reversal of $5.7 million and $32.6 million, respectively, resulting from a favorable legal settlement (see Note 8). Additionally, SG&A reflects severance costs of $7.6 million and $9.1 million for the three and nine months ended September 30, 2016, associated with actions taken to reduce overheads and the substantial completion of our corporate headquarters relocation from Michigan to Georgia, which began in 2013. Excluding these items, the increase in gross dollar SG&A reflects the addition of field resources and other variable costs related to increased production volumes combined with higher costs related to healthcare and professional fees. Additionally, SG&A for the nine months ended September 30, 2016, reflects the impact of transaction and integration costs associated with the assets acquired from Wieland in January 2016.

Equity in earnings of unconsolidated entities

Equity in earnings of unconsolidated entities was $0.5 million and $4.5 million for the three and nine months ended September 30, 2016, respectively, compared with $2.2 million and $4.5 million for the three and nine months ended September 30, 2015, respectively. The majority of our unconsolidated entities represent land development joint ventures. As a result, the timing of income and losses varies between periods depending on the timing of transactions and circumstances specific to each entity.

33



Other expense, net

Other expense, net includes the following ($000’s omitted):
 
Three Months Ended
 
Nine Months Ended
September 30,
 
September 30,
2016
 
2015
 
2016
 
2015
Write-off of deposits and pre-acquisition costs
$
2,541

 
$
522

 
$
12,996

 
$
3,633

Lease exit and related costs
4,644

 
275

 
10,589

 
497

Amortization of intangible assets
3,450

 
3,225

 
10,350

 
9,675

Interest income
(887
)
 
(504
)
 
(2,659
)
 
(2,458
)
Interest expense
165

 
203

 
526

 
598

Equity in earnings of unconsolidated entities
(485
)
 
(2,192
)
 
(4,489
)
 
(4,464
)
Miscellaneous, net
14,347

 
19,804

 
15,429

 
16,157

 
$
23,775

 
$
21,333

 
$
42,742

 
$
23,638


Lease exit and related costs for the three and nine months ended September 30, 2016, resulted from actions taken to reduce overheads and the substantial completion of our corporate headquarters relocation from Michigan to Georgia, which began in 2013. The increase in write-offs of deposits and pre-acquisition costs for the nine months ended September 30, 2016 related primarily to one project in California that we elected to not complete. Miscellaneous, net includes a charge of $15.0 million related to the settlement of a disputed land transaction for the three and nine months ended September 30, 2016, and a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 8).

Net new orders

Net new order units increased 17% for the three months ended September 30, 2016 compared with the three months ended September 30, 2015. For the three months ended September 30, 2016, the communities acquired from Wieland contributed to this growth in units by 5%. For the nine months ended September 30, 2016, net new order units increased by 12%. Wieland's contribution to this growth was 3%. Excluding the Wieland assets, our growth in net new order units resulted from the higher number of active communities combined with a small improvement in sales pace per community. Net new orders in dollars increased by 25% and 23% for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015 due to the growth in units combined with the higher average selling price. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 16% and 14% for the three and nine months ended September 30, 2016, respectively, compared to 17% and 13% for the same periods in 2015. Ending backlog units and dollars, which represent orders for homes that have not yet closed, increased 8% and 20%, respectively, at September 30, 2016 compared with September 30, 2015, as a result of the higher net new order volume. The growth in backlog dollars was also impacted by the higher average selling price.

Homes in production

The following is a summary of our homes in production at September 30, 2016 and September 30, 2015:
 
September 30,
2016
 
September 30,
2015
Sold
7,053

 
6,491

Unsold
 
 
 
Under construction
1,581

 
1,015

Completed
601

 
343

 
2,182

 
1,358

Models
1,059

 
967

Total
10,294

 
8,816



34



The number of homes in production at September 30, 2016 was 17% higher than at September 30, 2015 due to a number of factors, including the higher net new order volume and backlog and a decision to purposefully increase the number of unsold homes under construction ("spec homes"). The increase in spec homes reflects our intention to achieve a more even production cycle over the course of 2016 compared with 2015. Though inventory levels will fluctuate throughout the year, we expect our overall level of spec home starts to moderate over the year. As part of our inventory management strategies, we will continue to maintain reasonable inventory levels relative to demand in each of our markets.

Controlled lots

The following is a summary of our lots under control at September 30, 2016 and December 31, 2015:
 
September 30, 2016
 
December 31, 2015
 
Owned
 
Optioned
 
Controlled
 
Owned
 
Optioned
 
Controlled
Northeast
6,490

 
4,316

 
10,806

 
6,361

 
4,114

 
10,475

Southeast (a)
16,867

 
8,284

 
25,151

 
11,161

 
7,933

 
19,094

Florida
21,592

 
9,787

 
31,379

 
21,230

 
9,636

 
30,866

Midwest
12,606

 
7,668

 
20,274

 
13,093

 
6,985

 
20,078

Texas
13,938

 
8,871

 
22,809

 
13,308

 
7,052

 
20,360

West
30,383

 
4,450

 
34,833

 
30,766

 
6,440

 
37,206

Total
101,876

 
43,376

 
145,252

 
95,919

 
42,160

 
138,079

 
 
 
 
 
 
 
 
 
 
 
 
Developed (%)
30
%
 
18
%
 
27
%
 
28
%
 
12
%
 
23
%

(a)
Southeast includes the acquisition of substantially all of the assets of Wieland in January 2016 (see Note 1).

Of our controlled lots, 101,876 and 95,919 were owned and 43,376 and 42,160 were controlled under land option agreements at September 30, 2016 and December 31, 2015, respectively. While competition for well-positioned land is robust, we continue to pursue strategic land positions that drive appropriate returns on invested capital. The remaining purchase price under our land option agreements totaled $2.2 billion at September 30, 2016. These land option agreements, which generally may be canceled at our discretion and in certain cases extend over several years, are secured by deposits and pre-acquisition costs totaling $173.7 million at September 30, 2016, of which $9.2 million is refundable.

Homebuilding Segment Operations

As of September 30, 2016, we conducted our operations in 48 markets located throughout 25 states. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:

 
Northeast:
 
Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Virginia
Southeast:
 
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Midwest:
 
Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Ohio
Texas:
 
Texas
West:
 
Arizona, California, Nevada, New Mexico, Washington


35



The following tables present selected financial information for our reportable Homebuilding segments:
 
 
Operating Data by Segment ($000's omitted)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2016 vs. 2015
 
2015
 
2016
 
2016 vs. 2015
 
2015
Home sale revenues:
 
 
 
 
 
 
 
 
 
 
 
Northeast
$
155,076

 
(14
)%
 
$
181,157

 
$
426,212

 
 %
 
$
427,851

Southeast (a)
372,639

 
32
 %
 
282,051

 
1,052,689

 
48
 %
 
713,090

Florida
306,323

 
24
 %
 
247,159

 
856,703

 
30
 %
 
657,555

Midwest
342,332

 
34
 %
 
255,884

 
817,709

 
24
 %
 
657,393

Texas
261,693

 
29
 %
 
203,243

 
729,170

 
29
 %
 
565,179

West
443,655

 
51
 %
 
294,637

 
1,145,360

 
48
 %
 
774,298

 
$
1,881,718

 
29
 %
 
$
1,464,131

 
$
5,027,843

 
32
 %
 
$
3,795,366

Income (loss) before income taxes:
 
 
 
 
 
 
 
 
 
 
 
Northeast (b)
$
6,056

 
(54
)%
 
$
13,208

 
$
34,884

 
(8
)%
 
$
38,065

Southeast (a)
36,370

 
(20
)%
 
45,708

 
96,898

 
(12
)%
 
110,203

Florida
45,891

 
(6
)%
 
49,046

 
130,546

 
7
 %
 
121,585

Midwest
36,792

 
46
 %
 
25,270

 
68,665

 
67
 %
 
41,080

Texas
38,878

 
49
 %
 
26,035

 
103,618

 
41
 %
 
73,313

West
55,347

 
51
 %
 
36,633

 
130,683

 
30
 %
 
100,154

Other homebuilding (c)
(28,271
)
 
9
 %
 
(30,989
)
 
(93,252
)
 
(31
)%
 
(71,104
)
 
$
191,063

 
16
 %
 
$
164,911

 
$
472,042

 
14
 %
 
$
413,296

Closings (units):
 
 
 
 
 
 
 
 
 
 
 
Northeast
317

 
(21
)%
 
401

 
889

 
(8
)%
 
965

Southeast (a)
948

 
10
 %
 
865

 
2,799

 
24
 %
 
2,249

Florida
836

 
17
 %
 
712

 
2,348

 
23
 %
 
1,910

Midwest
938

 
24
 %
 
756

 
2,276

 
15
 %
 
1,984

Texas
948

 
15
 %
 
821

 
2,646

 
14
 %
 
2,321

West
1,050

 
31
 %
 
801

 
2,796

 
37
 %
 
2,036

 
5,037

 
16
 %
 
4,356

 
13,754

 
20
 %
 
11,465

Average selling price:
 
 
 
 
 
 
 
 
 
 
 
Northeast
$
489

 
8
 %
 
$
452

 
$
479

 
8
 %
 
$
443

Southeast (a)
393

 
21
 %
 
326

 
376

 
19
 %
 
317

Florida
366

 
6
 %
 
347

 
365

 
6
 %
 
344

Midwest
365

 
8
 %
 
338

 
359

 
8
 %
 
331

Texas
276

 
12
 %
 
248

 
276

 
13
 %
 
244

West
423

 
15
 %
 
368

 
410

 
8
 %
 
380

 
$
374

 
11
 %
 
$
336

 
$
366

 
10
 %
 
$
331


(a)
Southeast includes the acquisition in January 2016 of substantially all of the assets of Wieland (see Note 1).
(b)
Northeast includes a charge of $15.0 million related to the settlement of a disputed land transaction for the three and nine months ended September 30, 2016, and a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 8).
(c)
Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. For the three and nine months ended September 30, 2015, Other homebuilding also includes a reserve reversal of $5.7 million and $32.6 million, respectively resulting from a favorable legal settlement.

36



 
 
Operating Data by Segment ($000's omitted)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2016 vs. 2015
 
2015
 
2016
 
2016 vs. 2015
 
2015
Net new orders - units:
 
 
 
 
 
 
 
 
 
 
 
Northeast
325

 
(6
)%
 
346

 
1,055

 
(14
)%
 
1,226

Southeast (a)
938

 
20
 %
 
780

 
3,006

 
9
 %
 
2,759

Florida
946

 
25
 %
 
755

 
2,880

 
17
 %
 
2,471

Midwest
817

 
28
 %
 
639

 
2,870

 
29
 %
 
2,232

Texas
852

 
22
 %
 
698

 
3,009

 
7
 %
 
2,808

West
897

 
3
 %
 
874

 
3,304

 
16
 %
 
2,853

 
4,775

 
17
 %
 
4,092

 
16,124

 
12
 %
 
14,349

Net new orders - dollars:
 
 
 
 
 
 
 
 
 
 
 
Northeast
$
154,551

 
(3
)%
 
$
159,054

 
$
517,282

 
(5
)%
 
$
546,356

Southeast (a)
381,992

 
42
 %
 
268,591

 
1,165,970

 
28
 %
 
911,631

Florida
349,962

 
31
 %
 
266,893

 
1,069,220

 
21
 %
 
884,506

Midwest
304,948

 
34
 %
 
227,138

 
1,048,700

 
31
 %
 
800,855

Texas
241,242

 
24
 %
 
194,272

 
834,874

 
14
 %
 
735,354

West
398,644

 
14
 %
 
349,374

 
1,451,288

 
37
 %
 
1,061,858

 
$
1,831,339

 
25
 %
 
$
1,465,322

 
$
6,087,334

 
23
 %
 
$
4,940,560

Cancellation rates:
 
 
 
 
 
 
 
 
 
 
 
Northeast
11
%
 
 
 
15
%
 
11
%
 
 
 
12
%
Southeast (a)
15
%
 
 
 
12
%
 
14
%
 
 
 
9
%
Florida
11
%
 
 
 
10
%
 
11
%
 
 
 
10
%
Midwest
15
%
 
 
 
15
%
 
12
%
 
 
 
13
%
Texas
20
%
 
 
 
26
%
 
17
%
 
 
 
18
%
West
21
%
 
 
 
22
%
 
18
%
 
 
 
17
%
 
16
%
 
 
 
17
%
 
14
%
 
 
 
13
%
Unit backlog:
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
 
 
 
 
 
610

 
(16
)%
 
722

Southeast (a)
 
 
 
 
 
 
1,669

 
13
 %
 
1,478

Florida
 
 
 
 
 
 
1,806

 
16
 %
 
1,563

Midwest
 
 
 
 
 
 
1,683

 
17
 %
 
1,436

Texas
 
 
 
 
 
 
1,708

 
(3
)%
 
1,760

West
 
 
 
 
 
 
1,941

 
9
 %
 
1,775

 
 
 
 
 
 
 
9,417

 
8
 %
 
8,734

Backlog dollars:
 
 
 
 
 
 
 
 
 
 
 
Northeast
 
 
 
 
 
 
$
302,602

 
(10
)%
 
$
334,482

Southeast (a)
 
 
 
 
 
 
699,710

 
40
 %
 
499,574

Florida
 
 
 
 
 
 
702,801

 
22
 %
 
576,919

Midwest
 
 
 
 
 
 
613,351

 
19
 %
 
513,498

Texas
 
 
 
 
 
 
481,364

 
 %
 
481,599

West
 
 
 
 
 
 
899,092

 
32
 %
 
682,983

 
 
 
 
 
 
 
$
3,698,920

 
20
 %
 
$
3,089,055

(a)
Southeast includes the acquisition of substantially all of the assets of Wieland in January 2016 (see Note 1).


37



Northeast

For the third quarter of 2016, Northeast home sale revenues decreased 14% compared with the prior year period due to a 21% decrease in closings offset by an 8% increase in the average selling price. The increase in average selling price was mainly in the Northeast Corridor and New England. The decrease in closings occurred mainly in the Northeast Corridor and Mid-Atlantic. Net new orders decreased 6%, primarily in the Northeast Corridor and Mid-Atlantic.

For the nine months ended September 30, 2016, Northeast home sale revenues were flat compared with the prior year period due to an 8% decrease in closings, offset by an 8% increase in the average selling price. The decrease in closings was concentrated in the Northeast Corridor and New England, and the increase in average selling price occurred across all markets. The decreased income before income taxes resulted from lower margins in the Mid-Atlantic and New England and increased overhead experienced in all markets. Net new orders decreased 14% due to reduced order levels in the Northeast Corridor and Mid-Atlantic.

Northeast income before income taxes also includes a charge of $15.0 million related to the settlement of a disputed land transaction for the three and nine months ended September 30, 2016, and a charge of $20.0 million resulting from the Applecross matter for the three and nine months ended September 30, 2015 (see Note 8).

Southeast

In 2016, the Southeast was significantly impacted by the acquisition of substantially all of the assets of Wieland in January 2016 (see Note 1). For the third quarter of 2016, Southeast home sale revenues increased 32% compared with the prior year period due to a 21% increase in the average selling price combined with a 10% increase in closings. The increase in average selling price and the increase in closing volumes occurred across all markets, and are largely due to contributions from the assets acquired from Wieland. Income before income taxes decreased due to lower margins in Georgia and Charlotte and increased overhead experienced by all markets. Net new orders increased 20% primarily due to higher order levels in Raleigh and Georgia.

For the nine months ended September 30, 2016, Southeast home sale revenues increased 48% compared with the prior year as the result of an increase in closings and average selling prices of 24% and 19%, respectively. These increases are largely due to contributions from the assets acquired from Wieland. Excluding those closings, revenues still increased significantly compared with the prior year. Income before income taxes decreased 12% as result of transaction and integration costs associated with the assets acquired from Wieland . Net new orders increased 9%, primarily due to the assets acquired from Wieland.

Florida

For the third quarter of 2016, Florida home sale revenues increased 24% compared with the prior year period due to a 17% increase in closings combined with a 6% increase in the average selling price. The increase in closings occurred mainly in North Florida, and the increase in average selling price occurred in both North and Southwest Florida. Income before income taxes decreased primarily due to the higher overheads. Net new orders increased 25%, reflecting improved order levels across all markets.

For the nine months ended September 30, 2016, Florida home sale revenues increased 30% compared with the prior year period due to a 6% increase in the average selling price combined with a 23% increase in closings. Income before income taxes increased primarily due to the higher revenues. Net new orders increased 17% due largely to a greater number of active communities in North Florida.

Midwest

For the third quarter of 2016, Midwest home sale revenues increased 34% compared with the prior year period due to an 8% increase in average selling price combined with a 24% increase in closings. The higher revenues occurred across all markets. The increased revenues led to an increase in income before income taxes. Net new orders increased across all markets.

For the nine months ended September 30, 2016, Midwest home sale revenues increased 24% compared with the prior year period due to an 8% increase in average selling price combined with a 15% increase in closings. The higher revenues occurred across all markets. Net new orders increased across all markets.

38



Texas

For the third quarter of 2016, Texas home sale revenues increased 29% compared with the prior year period due to a 15% increase in closings combined with a 12% increase in the average selling price. The increase in average selling price and the increase in closings were broad-based across all markets. The increased revenues and increased closings led to an increase in income before income taxes. Net new orders increased overall by 22%, primarily in Dallas and evenly across the remaining markets.

For the nine months ended September 30, 2016, Texas home sale revenues increased 29% compared with the prior year period due to a 14% increase in closings combined with a 13% increase in the average selling price. The increase in average selling price was broad-based across all markets, while the increase in closings occurred across all markets with the exception of San Antonio. The higher revenues and higher closings led to an increase in income before income taxes. Net new orders increased 7%, with an increase in Dallas, Houston and Central Texas offset by lower orders in San Antonio.

West

For the third quarter of 2016, West home sale revenues increased 51% compared with the prior year period due to a 31% increase in closings combined with a 15% increase in average selling price. The increased closings and higher average selling price occurred across all markets, except Southern California, which had a slight mix shift. Income before income taxes increased due to higher revenues offset by lower gross margins. Net new orders showed a slight increase of 3%, primarily in the Pacific Northwest and Southern California offset by a decrease in Northern California.

For the nine months ended September 30, 2016, West home sale revenues increased 48% compared with the prior year period due to a 37% increase in closings combined with an 8% increase in average selling price. The increased closings and higher average selling price were broad-based, with the exception of a slight decrease in the Pacific Northwest. Income before income taxes increased as a result of higher revenues offset by lower gross margins. Net new orders increased 16% and occurred across all markets.



39


Financial Services Operations

We conduct our Financial Services operations, which include mortgage and title operations, through Pulte Mortgage and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to supporting our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding. Our Homebuilding customers continue to account for substantially all loan production. We believe that our capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model. The following tables present selected financial information for our Financial Services operations ($000's omitted):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2016 vs. 2015
 
2015
 
2016
 
2016 vs. 2015
 
2015
Mortgage operations revenues
$
38,320

 
21
%
 
$
31,714

 
$
100,162

 
28
%
 
$
78,106

Title services revenues
9,700

 
34
%
 
7,253

 
26,788

 
39
%
 
19,213

Total Financial Services revenues
48,020

 
23
%
 
38,967

 
126,950

 
30
%
 
97,319

Expenses
26,906

 
9
%
 
24,602

 
79,204

 
17
%
 
67,909

Other expense (income), net
(158
)
 
100
%
 

 
(340
)
 
100
%
 
1

Income before income taxes
$
21,272

 
48
%
 
$
14,365

 
$
48,086

 
64
%
 
$
29,409

Total originations:
 
 
 
 
 
 
 
 
 
 
 
Loans
3,417

 
14
%
 
2,992

 
9,123

 
20
%
 
7,615

Principal
$
945,859

 
23
%
 
$
766,450

 
$
2,481,177

 
29
%
 
$
1,916,391




 
Nine Months Ended
 
September 30,
 
2016
 
2015
Supplemental data:
 
 
 
Capture rate
80.9
%
 
82.9
%
Average FICO score
750

 
749

Loan application backlog
$
2,057,460

 
$
1,683,300

Funded origination breakdown:
 
 
 
FHA
10
%
 
12
%
VA
13
%
 
13
%
USDA
1
%
 
1
%
Other agency
70
%
 
68
%
Total agency
94
%
 
94
%
Non-agency
6
%
 
6
%
Total funded originations
100
%
 
100
%




40


Revenues

Total Financial Services revenues for the three and nine months ended September 30, 2016 increased 23% and 30%, respectively, when compared to the same periods in 2015. These changes were primarily related to higher loan origination volume resulting from higher volumes in the Homebuilding segment combined with higher revenues per loan, which were largely attributable to a higher average loan size combined with favorable market conditions.

Income before income taxes

Income before income taxes for the three and nine months ended September 30, 2016 increased 48% and 64%, respectively, when compared to the prior year periods. This increase resulted primarily from the increase in revenues combined with better overhead leverage.

Income Taxes

Our effective tax rate for the three and nine months ended September 30, 2016 was 39.5% and 36.6%, respectively, compared to 39.9% for the same periods in 2015. Our effective tax rate for the current year differed from the federal statutory tax rate primarily due to state income taxes on current year earnings, the favorable resolution of certain state income tax matters, and adjustments to deferred tax assets due to changes in state tax laws. For the prior year, our effective tax rate differed from the federal statutory tax rate primarily due to state income taxes and adjustments to deferred taxes due to changes in state tax laws and business operations. 

Liquidity and Capital Resources

We finance our land acquisition, development, and construction activities and financial services operations using internally-generated funds supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing other available financing sources, including revolving bank credit and securities offerings, and may determine that modifications to our financing are appropriate.

At September 30, 2016, we had unrestricted cash and equivalents of $434.2 million and $504.3 million available under our revolving credit facility. We also had restricted cash balances of $27.0 million. We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a broad portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term deposits and investments. We monitor our investments with each bank and do not believe our cash and equivalents are exposed to any material risk of loss. However, there can be no assurances that losses of principal balance on our cash and equivalents will not occur.

Our ratio of debt to total capitalization, excluding our Financial Services debt, was 40.0% at September 30, 2016.

Senior unsecured notes

In February 2016, we issued $1.0 billion of senior unsecured notes, consisting of $300 million of 4.25% senior notes due March 1, 2021, and $700 million of 5.50% senior notes due March 1, 2026. The net proceeds from this senior notes issuance were used to fund the retirement of $465.2 million of our senior notes that matured in May 2016, with the remaining net proceeds used for general corporate purposes. In July 2016, we issued an additional $1.0 billion of senior unsecured notes, consisting of an additional $400 million of the 4.25% senior notes due March 1, 2021, and $600 million of 5.00% senior notes due January 15, 2027. The net proceeds from the July senior notes issuance were used for general corporate purposes and to pay down approximately $500.0 million of outstanding debt, including the remainder of the previously existing term loan facility. The senior notes issued in 2016 are unsecured obligations, and rank equally in right of payment with the existing and future senior unsecured indebtedness of the Company and each of the guarantors, respectively. The notes are redeemable at our option at any time up to the date of maturity.

Revolving credit facility

In June 2016, we entered into an amended and restated senior unsecured revolving credit facility (the “Revolving Credit Facility”) that provided for an increase in our maximum borrowings from $500.0 million to $750.0 million and extended the maturity date from July 2017 to June 2019. The Revolving Credit Facility contains an uncommitted accordion feature that could increase the size of the Revolving Credit Facility to $1.25 billion, subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available

41


borrowing capacity under the Revolving Credit Facility with a sublimit of $375.0 million at September 30, 2016. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined.  We had no borrowings outstanding and $245.7 million and $191.3 million of letters of credit issued under the Revolving Credit Facility at September 30, 2016 and December 31, 2015, respectively.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of September 30, 2016, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries.

Limited recourse notes payable

Certain of our local homebuilding operations maintain limited recourse collateralized notes payable with third parties that totaled $20.5 million at September 30, 2016 and $35.3 million at December 31, 2015. These notes have maturities ranging up to four years, are collateralized by the applicable land positions to which they relate, have no recourse to any other assets, and are classified within accrued and other liabilities. The stated interest rates on these notes range up to 5.00%.

Pulte Mortgage

Pulte Mortgage maintains a master repurchase agreement (the “Repurchase Agreement”) with third party lenders. In August 2016, Pulte Mortgage entered into an amended and restated Repurchase Agreement that extended the effective date to August 2017, and adjusted the maximum aggregate commitment amount according to seasonal borrowing capacity needs. The maximum aggregate commitment is $175.0 million as of August 15, 2016, and increases to as high as $300.0 million during the seasonally high borrowing period from December 27, 2016 through January 12, 2017. At all other times, the maximum aggregate commitment ranges from $175.0 million to $200.0 million. The purpose of the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $158.8 million and $267.9 million outstanding under the Repurchase Agreement at September 30, 2016 and December 31, 2015, respectively, and was in compliance with all of its covenants and requirements as of such dates.

Dividends and share repurchase program

During the nine months ended September 30, 2016, we declared cash dividends totaling $93.1 million and repurchased 17.7 million shares under our repurchase authorization for a total of $347.7 million. Such repurchases are reflected as reductions of common stock and retained earnings. In July 2016, our Board of Directors approved a $1.0 billion increase in our share repurchase authorization. At September 30, 2016, we had remaining authorization to repurchase $1.3 billion of common shares. We currently expect, subject to market conditions, to repurchase $250.0 million of shares in the fourth quarter of 2016 and $1.0 billion of shares in 2017.

Cash flows

Operating activities

Our net cash used in operating activities for the nine months ended September 30, 2016 was $312.2 million, compared with net cash used in operating activities of $244.9 million for the nine months ended September 30, 2015. Generally, the primary drivers of our cash flow from operations are profitability and changes in inventory levels. The negative cash flow from operations for the nine months ended September 30, 2016 was primarily due to a net increase in inventories of $1.1 billion resulting from ongoing land acquisition and development investment to support future growth combined with a seasonal build of house inventory. These uses of cash were partially offset by our pretax income of $520.1 million combined with a seasonal reduction of $92.6 million in residential mortgage loans available-for-sale.

Our negative cash flow from operations for the nine months ended September 30, 2015, was primarily due to a net increase in inventories of $835.3 million resulting from increased land investment, partially offset by our pretax income of $442.7 million and a seasonal reduction of $68.4 million in residential mortgage loans available-for-sale.
 



42


Investing activities

Investing activities are generally not a significant source or use of cash for us. Net cash used by investing activities for the nine months ended September 30, 2016 was $469.6 million, compared with net cash used by investing activities of $20.4 million for the nine months ended September 30, 2015. The cash used in investing activities for the nine months ended September 30, 2016 was primarily due to the acquisition of certain real estate assets from Wieland (see Note 1).

Financing activities

Net cash provided by financing activities for the nine months ended September 30, 2016 totaled $461.8 million, compared with net cash used in financing activities of $293.4 million for the nine months ended September 30, 2015. The net cash used in financing activities for the nine months ended September 30, 2016 resulted primarily from the retirement of $465.2 million of our senior notes that matured in May 2016, repayment of our previously outstanding term loan, the repurchase of 17.7 million common shares for $347.7 million under our repurchase authorization, payment of $94.3 million in cash dividends, and net repayments of $109.1 million for borrowings under the Repurchase Agreement related to a seasonal reduction in residential mortgage loans available-for-sale. These uses of cash were offset by the proceeds of the February and July senior unsecured notes issuance for $2.0 billion.

Net cash used in financing activities for the nine months ended September 30, 2015 resulted primarily from the retirement of $238.5 million of our senior notes at their scheduled maturity date, $32.7 million of net repayments under the Repurchase Agreement, and the repurchase of 21.2 million common shares for $433.7 million under our repurchase authorization.

Inflation

We, and the homebuilding industry in general, may be adversely affected during periods of inflation because of higher land and construction costs. Inflation may also increase our financing costs. In addition, higher mortgage interest rates affect the affordability of our products to prospective homebuyers. While we attempt to pass on to our customers' increases in our costs through increased sales prices, market forces may limit our ability to do so. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins, and net income could be adversely affected.

Seasonality

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we historically experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations during the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year.

Contractual Obligations and Commercial Commitments

We issued $1.0 billion of senior unsecured notes in both February and July 2016. The repayment terms are described in Note 4. We also retired $465.2 million of our senior notes that matured in May 2016, and repaid the remainder of our previously outstanding term loan in July 2016. We also amended the Revolving Credit Facility, which provided for an increase in our maximum borrowings from $500.0 million to $750.0 million and extended the maturity date from July 2017 to June 2019, and entered into an amended and restated Repurchase Agreement for Pulte Mortgage that extended the effective date to August 2017 and adjusted the maximum aggregate commitment amount according to seasonal borrowing capacity needs. There have been no other material changes to our contractual obligations from those disclosed in our "Contractual Obligations and Commercial Commitments" contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Off-Balance Sheet Arrangements

We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our homebuilding projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects. If the obligations related to a project are ongoing, annual

43


extensions of the letters of credit are typically granted on a year-to-year basis. At September 30, 2016, we had outstanding letters of credit totaling $245.7 million. Our surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $1.1 billion at September 30, 2016, are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. At September 30, 2016, these agreements had an aggregate remaining purchase price of $2.2 billion. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.

At September 30, 2016, aggregate outstanding debt of unconsolidated joint ventures was $6.5 million, of which our proportionate share was $2.1 million. Of this amount, we provided limited recourse guaranties for less than $0.2 million at September 30, 2016.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2016 compared with those contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015.
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Quantitative disclosure
We are subject to market risk on our debt instruments primarily due to fluctuations in interest rates. We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair value of the debt instrument but not our earnings or cash flows. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair value of the debt instrument but could affect our earnings and cash flows. Except in very limited circumstances, we do not have an obligation to prepay fixed-rate debt prior to maturity. As a result, interest rate risk and changes in fair value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance or repurchase such debt.
The following tables set forth the principal cash flows by scheduled maturity, weighted-average interest rates, and estimated fair value of our debt obligations as of September 30, 2016 ($000’s omitted):
 
As of September 30, 2016 for the
Years ending December 31,
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
Fair
Value
Rate-sensitive liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
$
2,033

 
$
133,634

 
$

 
$
3,900

 
$
3,900

 
$
3,000,000

 
$
3,143,467

 
$
3,291,345

Average interest rate
2.86
%
 
7.16
%
 
%
 
5.00
%
 
5.00
%
 
5.51
%
 
5.58
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate debt (a)
$

 
$
158,793

 
$

 
$

 
$

 
$

 
$
158,793

 
$
158,793

Average interest rate
%
 
2.90
%
 
%
 
%
 
%
 
%
 
2.90
%
 
 

(a) Includes the Pulte Mortgage Repurchase Agreement. Does not include our Revolving Credit Facility, under which there were no borrowings outstanding at either September 30, 2016 or December 31, 2015.

Qualitative disclosure

There have been no material changes to the qualitative disclosure found in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K for the year ended December 31, 2015.


44



SPECIAL NOTES CONCERNING FORWARD-LOOKING STATEMENTS

As a cautionary note, except for the historical information contained herein, certain matters discussed in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 3, Quantitative and Qualitative Disclosures About Market Risk, are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in, or implied by, these statements. You can identify these statements by the fact that they do not relate to matters of a strictly factual or historical nature and generally discuss or relate to forecasts, estimates or other expectations regarding future events. Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “project,” “may,” “can,” “could,” “might,” “will” and similar expressions identify forward-looking statements, including statements related to expected operating and performing results, planned transactions, planned objectives of management, future developments or conditions in the industries in which we participate and other trends, developments and uncertainties that may affect our business in the future.

Such risks, uncertainties and other factors include, among other things: interest rate changes and the availability of mortgage financing; continued volatility in the debt and equity markets; competition within the industries in which we operate; the availability and cost of land and other raw materials used by us in our homebuilding operations; the impact of any changes to our strategy in responding to the cyclical nature of the industry, including any changes regarding our land positions and the rate of growth in land spend; the availability and cost of insurance covering risks associated with our businesses; shortages and the cost of labor; weather related slowdowns; slow growth initiatives and/or local building moratoria; governmental regulation directed at or affecting the housing market, the homebuilding industry or construction activities; uncertainty in the mortgage lending industry, including revisions to underwriting standards and repurchase requirements associated with the sale of mortgage loans; the interpretation of or changes to tax, labor and environmental laws; economic changes nationally or in our local markets, including inflation, deflation, changes in consumer confidence and preferences and the state of the market for homes in general; legal or regulatory proceedings or claims; our ability to generate sufficient cash flow in order to successfully implement our capital allocation priorities; required accounting changes; terrorist acts and other acts of war; and other factors of national, regional and global scale, including those of a political, economic, business and competitive nature. See PulteGroup's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, and other public filings with the Securities and Exchange Commission (the “SEC”) for a further discussion of these and other risks and uncertainties applicable to our businesses. We undertake no duty to update any forward-looking statement, whether as a result of new information, future events or changes in our expectations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based upon, and as of the date of that evaluation, our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2016.

Management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). There was no change in our internal control over financial reporting during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

45



PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities
 

Total number
of shares
purchased (1)
 

Average
price paid
per share (1)
 

Total number of
shares purchased
as part of publicly
announced plans
or programs
 

Approximate dollar
value of shares
that may yet be
purchased under
the plans or
programs
($000’s omitted)
July 1, 2016 to July 30, 2016
770,178

 
$
20.26

 
770,178

 
$
1,491,505

(2)
August 1, 2016 to August 31, 2016
5,425,006

 
$
21.35

 
5,425,006

 
$
1,375,665

(2)
September 1, 2016 to September 30, 2016
5,842,475

 
$
20.30

 
5,841,642

 
$
1,257,084

(2)
Total
12,037,659

 
$
20.77

 
12,036,826

 
 
 
 

(1)
During the third quarter of 2016, participants surrendered 833 shares for payment of minimum tax obligations upon the vesting or exercise of previously granted share-based compensation awards. Such shares were not repurchased as part of our publicly-announced share repurchase programs.

(2)
The Board of Directors approved share repurchase authorizations totaling $300.0 million and $1.0 billion in December 2015 and July 2016, respectively. During the nine months ended September 30, 2016, we repurchased 17.7 million shares for a total of $347.7 million. The share repurchase authorization has $1.3 billion remaining as of September 30, 2016. There is no expiration date for this program.


46





Item 6. Exhibits

Exhibit Number and Description
3
 
(a)
 
Restated Articles of Incorporation, of PulteGroup, Inc. (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K, filed with the SEC on August 18, 2009)
 
 
 
 
 
 
 
(b)
 
Certificate of Amendment to the Articles of Incorporation, dated March 18, 2010 (Incorporated by reference to Exhibit 3(b) of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010)
 
 
 
 
 
 
 
(c)
 
Certificate of Amendment to the Articles of Incorporation, dated May 21, 2010 (Incorporated by reference to Exhibit 3(c) of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010)
 
 
 
 
 
 
 
(d)
 
By-laws, as amended, of PulteGroup, Inc. (Incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K, filed with the SEC on May 6, 2016)
 
 
 
 
 
 
 
(e)
 
Certificate of Designation of Series A Junior Participating Preferred Shares, dated August 6, 2009 (Incorporated by reference to Exhibit 3(b) of our Registration Statement on Form 8-A, filed with the SEC on August 18, 2009)
 
 
 
 
 
4
 
(a)
 
Any instrument with respect to long-term debt, where the securities authorized thereunder do not exceed 10% of the total assets of PulteGroup, Inc. and its subsidiaries, has not been filed. The Company agrees to furnish a copy of such instruments to the SEC upon request.
 
 
 
 
 
 
 
(b)
 
Amended and Restated Section 382 Rights Agreement, dated as of March 18, 2010, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent, which includes the Form of Rights Certificate as Exhibit B thereto (Incorporated by reference to Exhibit 4 of PulteGroup, Inc.’s Registration Statement on Form 8-A/A, filed with the SEC on March 23, 2010)
 
 
 
 
 
 
 
(c)
 
Second Amendment to Amended and Restated Section 382 Rights Agreement, dated as of March 10, 2016, between PulteGroup, Inc. and Computershare Trust Company, N.A., as rights agent (Incorporated by reference to Exhibit 4.1 of PulteGroup, Inc.’s Current Report on Form 8-K, filed with the SEC on March 10, 2016)
 
 
 
 
 
10
 
(a)
 
Letter Agreement, dated July 20, 2016, by and between Elliott Associates, L.P., Elliott International, L.P.
and PulteGroup, Inc. (Incorporated by reference to Exhibit 10(d) of PulteGroup, Inc.'s Form 10-Q ,filed
with the SEC on July 21, 2016)
 
 
 
 
 
 
 
(b)
 
Third Amendment to Amended and Restated Master Repurchase Agreement dated August 15, 2016
(Incorporated by reference to Exhibit 10.1 of PulteGroup, Inc.'s Current Report on Form 8-K, filed with
the SEC on August 17, 2016)
 
 
 
 
 
 
 
(c)
 
Letter Agreement by and among William J. Pulte (grandson of the founder), William J. Pulte (founder), William J. Pulte Trust dtd 01/26/90, Joan B. Pulte Trust dtd 01/26/90 and PulteGroup, Inc., dated September 8, 2016 (Incorporated by reference to Exhibit 10.1 of PulteGroup, Inc.'s Current Report on Form 8-K, filed with the SEC on September 8, 2016)
 
 
 
 
 
 
 
(d)
 
Transition Agreement by and between PulteGroup, Inc. and Richard J. Dugas, Jr., dated September 8, 2016 (Incorporated by reference to Exhibit 10.2 of PulteGroup, Inc.'s Current Report on Form 8-K, filed with the SEC on September 8, 2016)
 
 
 
 
 
12
 
(a)
 
Computation of Ratio of Earnings to Fixed Charges for the six months ended June 30, 2016 and 2015 (Incorporated by reference to Exhibit 12.1 of PulteGroup, Inc.'s Current Report on Form 8-K, filed with the SEC on July 26, 2016)
 
 
 
 
 
31
 
(a)
 
Rule 13a-14(a) Certification by Ryan R. Marshall, President and Chief Executive Officer (Filed herewith)
 
 
 
 
 
 
 
(b)
 
Rule 13a-14(a) Certification by Robert T. O'Shaughnessy, Executive Vice President and Chief Financial Officer (Filed herewith)
 
 
 
 
 
32
 
 
 
Certification Pursuant to 18 United States Code § 1350 and Rule 13a-14(b) of the Securities Exchange Act of 1934 (Filed herewith)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

47


101.INS
 
 
 
XBRL Instance Document
 
 
 
 
 
101.SCH
 
 
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
101.CAL
 
 
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
101.DEF
 
 
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
101.LAB
 
 
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
101.PRE
 
 
 
XBRL Taxonomy Extension Presentation Linkbase Document

48


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

 
PULTEGROUP, INC.
 
 
 
 
 
 
 
 
 
 
/s/ Robert T. O'Shaughnessy
 
Robert T. O'Shaughnessy
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer and duly authorized officer)
 
Date:
October 20, 2016
 



49